COVID19: Proactive Credit Management in Times of Economic Disruption

Declaring the COVID-19 Pandemic an economic disruption at this point is an understatement. Few, if any of us, have experienced such a sudden drop in financial markets, lifestyles and ability to understand and predict what tomorrow may bring.

As business leaders navigating this type of uncharted waters it is imperative to become proactive in managing and guarding your company’s cash position. In other words, it’s time to keep your powder dry. Accounts receivable management is a good place to start managing cash, and one you have a fair amount of control over, which is actually good news in this uncertain time.

There is no doubt the order to cash cycle is going to be impacted in the near future because customers have experienced an interruption to their own cash cycle. Good customers, who have always paid on time, will likely be slow to pay. Slow payers will get worse or may not pay at all. The accounts receivable aging is going to look significantly different in the near future than it looks right now. Cash flow is going to look significantly different.

Credit management processes and procedures that have been in place for years are not going to be sufficient to deliver the results you need for financial stability.

Here are five proactive steps to navigate this changed climate, eliminate surprise problems and come out on the other end with less financial stress:

#1. Identify customer segments that likely have interrupted cash flow. Who in your customer base relies on distribution or services that you know for a fact have been greatly slowed or even stopped? Identify concentrations of risk using SIC coding, and determine how you are going to work with them if collecting becomes a problem.

#2. Check customer credit limits. Do existing credit limits still make sense in today’s unique environment? Do not take on the laborious task of reviewing and adjusting every credit limit in the whole book of business, but take those higher risk guys already under the microscope and ask, do we need to adjust these credit limits? Who are the top 20% of high volume, perhaps high risk, customers?

#3. Educate staff. Inform and train them that this is a changing landscape. It is not business as usual. Credit personnel, customer service, dispatchers, sales, other warehouse or bulk plant locations that are (rightfully so) very big on customer service need to be clear that product release is not going to be as free flowing as they are used to. There could be additional levels of approval needed. Customer credit limits might have been impacted.

What about a customer who suddenly swoops back in after three years of no orders and needs product? Is it because they stopped paying their other fuel supplier? The current environment calls for a higher level of risk management, accountability and trained employees.

#4. What are you willing to do to keep customers rolling through this time of stress? Be prepared to negotiate work-out situations, credit card payments, accepting a note receivable. Don’t shy away from asking for collateral or personal guarantees where you’ve not had one before. This sort of risk management needs to be discussed ahead of time, before collections staff are on the phone with a customer in stress. Work with your collections staff on what they have the authority to negotiate, and what needs to be referred up the chain of command.

Working through hard time situations like this with customers builds ongoing loyalty like nothing else.

#5. YOUR CASH. Make sure your banking situation is in shape to get through this period of stressed cash flow. It could be a good time to draw on your bank line of credit to assure a future cash position. Immediately check banking loan covenants and ratios to make sure your position is in good shape. Become an expert on special government programs and offerings to help keep cash healthy.

This new environment is going to dictate a proactive vs. reactive management on many levels of your organization. It’s been said the petroleum industry is recession-proof, but that doesn’t mean there won’t be extreme challenges. Stay diligent and forward thinking while navigating and protecting the financial health of your company while we get through this unique time.

Ann Pitts,

The Pitts Group

Ramp up cash flow through improvements to credit & collection practices

Cell: 817.304.1533